January 30, 2017, by Edge

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Macro Commentary

Perhaps President Trump is listening to the 1981 hit album from Olivia Newton-John Physical this week as he continues to press on the fiscal button. Executive orders were flying as the previously derailed Keystone pipeline was put back in play (as long as the steel pipes are made in the US) and the much-discussed Wall with Mexico was green lighted along with an increase of border patrol personnel. While we are still yet to see details of many of the proposals from the new administration, there is a common thread. While some of the policies are growth oriented (such as tax cuts), others inflationary (like trade protections and tariffs), and some are both (infrastructure) they all push up the “nominal” level of activity. Ever since the 1970s when inflation last ravaged the US economy, economists have focused their analysis on “real” statistics or those stated after adjustment for inflation. That said, as citizens we live in a nominal world. We buy items with nominal salaries, pay debt with nominal dollars, and state earnings of corporate activity in a nominal profits. It has been remarked that business confidence has a strong correlation to nominal levels of economic activity. Therefore, perhaps it is not surprising then that the primary contributor to Q4 GDP growth is the change in business investment – taking the reins from the consumer. Another sign of the animal spirit is the rise of the Dow as it soars past 20,000 for the first time. It will be important to watch that the policies put forward foster productivity (being more efficient) and create a multiplier (private dollars following government dollars) so that the fiscal boost sparks a sustainable lift to the US and doesn’t burn out in runaway inflation.

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